Research: Industrials
After a positive end to FY20, Polypipe has made an active start to FY21. The £210m acquisition of ADEY (part-funded by a c £96m gross new equity raise) is a significant step and fits well with the company’s product portfolio, market positions and its sustainable water/climate management business strategy. Including acquisition effects, we expect FY21 PBT to exceed FY19 levels, as they supplement an underlying EBIT recovery following a COVID-19-affected trough year. EPS approaches FY19 levels in FY22 (as the number of shares in issue is c 20% higher) on our estimates.
Polypipe |
Acquisitions feed into FY21 earnings recovery |
ADEY acquisition
|
Building & construction |
26 February 2021 |
Share price performance
Business description
Next events
Analyst
Polypipe is a research client of Edison Investment Research Limited |
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After a positive end to FY20, Polypipe has made an active start to FY21. The £210m acquisition of ADEY (part-funded by a c £96m gross new equity raise) is a significant step and fits well with the company’s product portfolio, market positions and its sustainable water/climate management business strategy. Including acquisition effects, we expect FY21 PBT to exceed FY19 levels, as they supplement an underlying EBIT recovery following a COVID-19-affected trough year. EPS approaches FY19 levels in FY22 (as the number of shares in issue is c 20% higher) on our estimates.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18** |
433.2 |
67.1 |
28.1 |
11.6 |
19.9 |
2.1 |
12/19 |
447.6 |
70.8 |
29.2 |
4.0 |
19.2 |
0.7 |
12/20e |
400.5 |
35.5 |
13.2 |
4.0 |
42.5 |
0.7 |
12/21e |
495.1 |
76.1 |
25.3 |
8.5 |
22.2 |
1.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **Continuing operations only. FY19 dividend represents the H1 payment only; no final dividend was declared.
Expanding climate management offering
ADEY is the UK’s leading provider of protection solutions for water-based heating systems, mainly for residential use. The company relocated to new facilities in the last year – the end of a three-year period in which it generated a 7% revenue CAGR – and generated revenue and EBITDA of c £51m and £18m (c 35% margin) in FY20. Increased penetration of the replacement cycle for existing central heating systems and, in time, new renewable energy-based ones, are expected to be the primary future growth drivers. Polypipe brings sector, channel and distribution expertise to help facilitate this drive. Moreover, there is a clear strategic fit with Nu-Heat (the supplier of sustainable underfloor and renewable energy heating systems, acquired for £27m earlier in February).
Earnings to rebound from trough FY20 year
Polypipe expects ADEY to be double-digit earnings accretive in the first full year post acquisition, with ROIC expected to match the company’s WACC in the second. A placing at 515p raised £96.3m gross for the company, funding just under half of the consideration with the remainder to come from existing borrowing facilities. In early January, Polypipe firmed up its FY20 guidance for EBIT ‘in excess of’ (previously ‘around’) £40m. Consequently, FY20 EPS will be just below half of the FY19 level. On our updated estimates, underlying recovery and acquisition effects return FY22 EPS almost back to FY19 levels.
Valuation: Share price returning to start year levels
The market has absorbed Polypipe’s share issue well and its share price is returning towards levels seen at the beginning of the year. On our revised estimates, an FY22e P/E of c 20x (and EV/EBITDA of 12.3x) looks full for the time being but it is still relatively early to call for a stronger post COVID-19 recovery in our view, until the economic ramifications of the current vaccination activity become more apparent.
Exhibit 1: Financial summary
£m |
2014 |
2015 |
2016 |
2016* |
2017* |
2018 |
2019 |
2020e |
2021e |
2022e |
|||
December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
327.0 |
352.9 |
436.9 |
387.2 |
411.7 |
433.2 |
447.6 |
400.5 |
495.1 |
526.9 |
|
Cost of Sales |
|
|
(202.4) |
(210.0) |
(256.8) |
(219.1) |
(236.0) |
(251.9) |
(255.2) |
(248.3) |
(287.2) |
(305.6) |
|
Gross Profit |
|
|
124.6 |
142.9 |
180.1 |
168.1 |
175.7 |
181.4 |
192.4 |
152.2 |
208.0 |
221.3 |
|
EBITDA |
|
|
60.8 |
69.3 |
86.4 |
84.5 |
88.3 |
90.6 |
99.1 |
62.8 |
107.9 |
116.0 |
|
Operating Profit (underlying) |
|
|
46.3 |
54.2 |
70.4 |
69.5 |
73.4 |
75.0 |
79.3 |
43.2 |
84.4 |
92.1 |
|
SBP |
|
|
0.0 |
0.0 |
(1.0) |
(1.0) |
(0.8) |
(1.0) |
(1.2) |
(1.2) |
(1.2) |
(1.2) |
|
Operating Profit (reported) |
|
|
46.3 |
54.2 |
69.4 |
68.5 |
72.6 |
74.0 |
78.1 |
42.0 |
83.2 |
90.9 |
|
Net Interest |
|
|
(7.7) |
(5.3) |
(6.6) |
(6.6) |
(5.8) |
(5.8) |
(6.2) |
(5.5) |
(6.5) |
(6.5) |
|
Other finance |
|
|
(1.0) |
(0.9) |
(1.0) |
(1.0) |
(1.1) |
(1.1) |
(1.1) |
(1.0) |
(0.6) |
(0.6) |
|
Intangible Amortisation |
|
|
0.0 |
(3.0) |
(6.8) |
(6.8) |
(5.5) |
(5.9) |
(7.5) |
(7.5) |
(7.5) |
(7.5) |
|
Exceptionals |
|
|
(20.7) |
(3.5) |
(0.6) |
(0.6) |
(4.6) |
(2.7) |
(3.2) |
(2.8) |
0.0 |
0.0 |
|
Profit Before Tax (norm) |
|
|
37.6 |
48.0 |
61.8 |
60.9 |
65.7 |
67.1 |
70.8 |
35.5 |
76.1 |
83.8 |
|
Profit Before Tax (statutory) |
|
|
16.9 |
41.5 |
54.4 |
53.5 |
55.6 |
58.5 |
60.1 |
25.2 |
68.6 |
76.3 |
|
Tax |
|
|
(5.4) |
(9.2) |
(11.8) |
(10.1) |
(11.8) |
(10.5) |
(11.9) |
(6.4) |
(13.7) |
(15.1) |
|
Profit After Tax (norm) |
|
|
32.2 |
38.8 |
50.0 |
49.2 |
53.9 |
56.5 |
58.9 |
29.1 |
62.4 |
68.7 |
|
Profit After Tax (statutory) |
|
|
11.5 |
32.3 |
42.6 |
43.4 |
43.8 |
49.1 |
49.6 |
20.1 |
56.2 |
62.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
199.9 |
199.3 |
198.9 |
198.9 |
198.4 |
199.0 |
199.3 |
218.2 |
244.5 |
244.5 |
||
EPS - normalised (p) |
|
|
16.1 |
19.4 |
25.0 |
24.6 |
26.9 |
28.1 |
29.2 |
13.2 |
25.3 |
27.8 |
|
EPS - statutory (p) |
|
|
5.8 |
16.2 |
21.4 |
22.2 |
22.1 |
24.7 |
24.9 |
9.2 |
23.0 |
25.6 |
|
Dividend per share (p) |
|
|
4.5 |
7.8 |
10.1 |
10.1 |
11.1 |
11.6 |
4.0 |
4.0 |
8.5 |
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
38.1 |
40.5 |
41.2 |
43.4 |
42.7 |
41.9 |
43.0 |
38.0 |
42.0 |
42.0 |
|
EBITDA Margin (%) |
|
|
18.6 |
19.6 |
19.8 |
21.8 |
21.4 |
20.9 |
22.1 |
15.7 |
21.8 |
22.0 |
|
Operating Margin (u/lying) (%) |
|
|
14.2 |
15.4 |
16.1 |
17.9 |
17.8 |
17.3 |
17.7 |
10.8 |
17.0 |
17.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
324.2 |
476.5 |
472.6 |
|
455.1 |
520.3 |
542.4 |
540.1 |
779.7 |
783.0 |
|
Intangible Assets |
|
|
235.0 |
378.4 |
371.6 |
|
356.5 |
401.9 |
401.8 |
395.3 |
624.8 |
617.3 |
|
Tangible Assets |
|
|
89.2 |
98.1 |
101.0 |
|
98.6 |
118.4 |
140.6 |
144.8 |
154.9 |
165.7 |
|
Investments |
|
|
0.0 |
0.0 |
0.0 |
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Current Assets |
|
|
103.9 |
99.6 |
119.5 |
|
147.7 |
141.7 |
148.2 |
188.2 |
135.9 |
177.5 |
|
Stocks |
|
|
39.9 |
47.5 |
52.2 |
|
53.5 |
58.1 |
59.7 |
62.6 |
74.4 |
79.2 |
|
Debtors |
|
|
20.2 |
29.3 |
38.9 |
|
32.6 |
37.2 |
40.5 |
38.0 |
47.2 |
50.0 |
|
Cash |
|
|
43.1 |
21.6 |
26.5 |
|
35.7 |
46.2 |
47.7 |
83.0 |
8.0 |
40.4 |
|
Current Liabilities |
|
|
(69.8) |
(87.2) |
(104.5) |
|
(108.8) |
(108.7) |
(108.1) |
(107.8) |
(118.7) |
(123.3) |
|
Creditors |
|
|
(69.8) |
(87.2) |
(104.5) |
|
(108.8) |
(108.7) |
(108.1) |
(107.8) |
(118.7) |
(123.3) |
|
Short term borrowings |
|
|
0.0 |
0.0 |
0.0 |
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Long Term Liabilities |
|
|
(120.6) |
(227.9) |
(200.2) |
|
(192.0) |
(222.1) |
(221.1) |
(121.4) |
(166.7) |
(168.1) |
|
Long term borrowings |
|
|
(118.0) |
(215.9) |
(190.8) |
|
(184.1) |
(210.4) |
(197.7) |
(98.4) |
(148.4) |
(148.4) |
|
Other long term liabilities |
|
|
(2.6) |
(12.0) |
(9.4) |
|
(7.9) |
(11.7) |
(23.4) |
(23.0) |
(18.3) |
(19.7) |
|
Net Assets |
|
|
237.7 |
261.0 |
287.4 |
|
302.0 |
331.2 |
361.4 |
499.1 |
630.2 |
669.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
50.6 |
72.6 |
86.5 |
|
79.2 |
90.0 |
89.4 |
59.1 |
90.1 |
111.3 |
|
Net Interest |
|
|
(10.4) |
(5.7) |
(7.3) |
|
(6.6) |
(6.1) |
(7.4) |
(5.5) |
(6.9) |
(6.9) |
|
Tax |
|
|
(3.7) |
(5.2) |
(10.1) |
|
(12.6) |
(11.2) |
(12.4) |
(8.5) |
(12.4) |
(13.7) |
|
Capex |
|
|
(14.9) |
(18.9) |
(18.7) |
|
(22.0) |
(23.2) |
(18.0) |
(20.8) |
(30.0) |
(31.0) |
|
Acquisitions/disposals |
|
|
(0.3) |
(149.5) |
0.0 |
|
0.0 |
(42.5) |
(12.2) |
(2.8) |
(237.0) |
0.0 |
|
Financing |
|
|
(1.7) |
0.0 |
(2.9) |
|
(0.7) |
0.3 |
2.4 |
116.5 |
91.5 |
(1.5) |
|
Dividends |
|
|
(3.0) |
(10.6) |
(17.1) |
|
(21.0) |
(22.3) |
(23.7) |
0.0 |
(16.7) |
(22.2) |
|
Net Cash Flow |
|
|
16.6 |
(117.3) |
30.5 |
|
16.3 |
(15.1) |
18.1 |
138.0 |
(121.4) |
36.0 |
|
Opening net debt/(cash) |
|
|
84.7 |
74.9 |
194.3 |
|
164.3 |
148.4 |
164.2 |
150.0 |
15.4 |
140.4 |
|
Finance leases initiated |
|
|
(9.6) |
(1.7) |
0.0 |
|
0.0 |
(1.6) |
(3.5) |
(3.6) |
(3.6) |
(3.6) |
|
Other |
|
|
2.8 |
(0.4) |
(0.5) |
|
(0.4) |
0.8 |
(0.4) |
0.2 |
(0.0) |
0.0 |
|
Closing net debt/(cash) |
|
|
74.9 |
194.3 |
164.3 |
|
148.4 |
164.2 |
150.0 |
15.4 |
140.4 |
108.0 |
|
Lease finance (under IFRS 16) |
|
|
|
|
|
|
|
|
14.8 |
13.5 |
13.5 |
13.5 |
|
|
Source: Company accounts, Edison Investment Research |
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McBride has delivered a good performance over H121, with higher revenues and improved gross margins. Input costs have started to increase, but the board’s expectations for the full year are unchanged. The company gave an update on its new strategy, Programme Compass, and as previously announced, the business has been reorganised into product divisions to sharpen focus, improve execution and increase speed to market. McBride has been through several strategy resets over the years and time will tell if this successfully addresses the company’s long-term challenges. The CEO has thorough knowledge of the business and there are not expected to be substantial exceptional or capital costs associated with the programme.